Innovative financial instrument designed to offer better services to exporting SMEs

4 October 2013
ITC News
New financial instrument offers risk-mitigation and financing options but more needs to be done for exporting SMEs from developing countries

Highlighting the importance of trade finance, panellists at a session of the WTO’s Public Forum on 2 October discussed a new payment instrument for international trade transactions that could lead to small and medium-sized enterprises (SMEs) gaining access to risk-mitigation and financing options that are not offered by more traditional options.

The session, entitled ‘Transformational evolution in trade finance: technology meets business proposition in the new Bank Payment Obligation’, introduced the new instrument, which relies on a bank-to-bank platform owned by SWIFT, a bank-owned financial transaction network, and on rules owned by the International Chamber of Commerce (ICC). Companies would still have a contract, but rather than existing payment options such as a letter of credit or open account, companies would select the BPO payment option.

‘We are really after increasing efficiency in recurring trade flows,’ said Mr André Casterman, Head of Corporate and Supply Chain Markets at SWIFT and a member of the International Chamber of Commerce Banking Commission’s executive committee. SWIFT provides the proprietary communications platform, products and services that allows financial information to be exchanged securely and reliably, he said.

‘We are enabling SMEs to get much more international access to banking services without the complexity of existing rules that govern such instruments as a letter of credit. The BPO will enable pre-shipment financing, which is critical to SMEs,’ Mr Casterman said.

Between 80% and 90% of global trade depends on some sort of trade finance. The recent financial crisis demonstrated the importance of trade finance to the international trading system and Mr Alexander Malaket, President of OPUS Advisory Services International, said that trade finance has never been promoted as prominently as it was currently being done. A drop in the availability of pre-shipment finance at the height of the crisis meant that trade flows decreased by more than 40% in some regions, Mr Malaket said.

Some US$ 3 trillion of world trade is still backed by letters of credit, said Mr Markus Wohlgeschaffen, Managing Director, Global Head of Trade Finance & Services, Global Transaction Banking at the Unicredit Group. But banks should focus on the BPO option in order to accommodate the rising volume of trade conducted on open account payment terms, he said.
Open account payment carries the most risk for the exporter, who must await payment after shipping the goods and commercial documents directly to the buyer. Typically, the open account option is used when the buyer and seller have an established relationship. 

Mr Torek Farhadi, a Senior Adviser on Access to Finance at the International Trade Centre, welcomed the new instrument as it improves transparency. He added that much more needed to be done to ensure that SMEs, particularly those in emerging countries, could take advantage of the risk-mitigation and other services of the trade finance world.

Given the importance of SMEs in creating jobs, Mr Farhadi said it would be important to invite smaller and regional banks into the network of 50 banks that currently provide the BPO service to clients. New innovative solutions need to be found to merge smaller African banks into the networks of larger banks. To further build connections between large and small banks, these solutions should include trainings and certifications for Know Your Customer (KYC) as well.

‘There is a role for international financial institutions (IFIs), with the support of banks to explain this process and to invite smaller banks to join. Currently, the larger banks tell smaller banks from sub-Saharan Africa that they can’t join their electronic networks because they can’t meet KYC regulations,’ Mr Farhadi said.

‘The challenge is, if developing-country SMEs want to get involved in international trade, how to make them understand the technicalities of cross-border trade. Trade finance is complex and BPO is the modernization of that,’ Mr Farhadi said.

‘I throw the challenge to the banking community to an SME package for BPO. There would be a case to lobby for the rules to be relaxed on small transfers to support job-creating SMEs do more business and unleash trade potential.’

The Public Forum was held on 1-3 October at World Trade Organization (WTO) headquarters in Geneva under the theme of ‘Expanding trade through innovation and the digital economy’.